Sanmiao formula (SM) is a basic prescription for the treatment of gouty and rheumatoid arthritis that has been used in China over a long period of history. However, there is no evidence associating SM with the treatment of osteoarthritis (OA). In this study, a characterization of the anti-OA effect of SM was conducted using an in vivo rat model induced by anterior cruciate ligament transection and medial meniscus resection (ACLT plus MMx), together with in vitro studies using chondrocytes for further molecular characterization. Rats subjected to ACLT plus MMx were treated with SM at doses of 0.63, 1.25 and 2.5 g/kg per day for three or six weeks. SM treatment significantly inhibited the histopathological changes of articular cartilage damage and synovial inflammation in the rats following ACLT plus MMx. SM (2.5 g/kg) clearly inhibited chondrocyte apoptosis and prevented cartilage matrix degradation, which was indicated by the increased proteoglycan and collagen content, particularly with regard to type II collagen expression in articular cartilage. Furthermore, SM (2.5 g/kg) markedly inhibited the release of interleukin (IL)-1β, tumor necrosis factor-α and nitric oxide in serum, while simultaneously increasing the levels of bone morphogenetic protein-2 and transforming growth factor-β in the circulation. Notably, SM (2.5 g/kg) clearly attenuated the OA-augmented expression of matrix metalloproteinase (MMP)-13 and augmented the OA-reduced expression of tissue inhibitor of metalloproteinase (TIMP)-1 in the knee joints. In addition, SM significantly reduced the proportion of early and late apoptotic and sub-G1 phase cells, and clearly decreased the expression of MMP-13 and increased that of TIMP-1 at the mRNA and protein levels in IL-1β-induced chondrocytes. These findings provide the first evidence that SM effectively treats OA by inhibiting chondrocyte apoptosis, cartilage matrix degradation and the inflammatory response.